Nature of Accounts

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NATURE OF ACCOUNTS

A separate account is maintained for each item in the balance sheet. Transactions may be recorded by entering the amount by which each item is affected into the respective account. The process of recording transactions consists of

• T-Accounts. The T-account, named for its shape, is a convenient way of representing an account on a piece of paper. The T, with the account name entered at the top, permits transaction information to be entered on either side of the vertical line. To record transactions, we must be able to record additions to as well as subtractions from accounts. This is easily handled in T-accounts by designating that additions are to be recorded on one side of the vertical line and subtractions on the other. By convention, assets are increased by entries on the left side of the account and are decreased by entries on the right side of the account. Entries to liability and stockholders’ equity accounts are handled in the reverse manner. They are increased by entries on the right side and are decreased by entries on the left side. These rules may be summarized as follows:

• Assets are increased by entries on the left side.
• Assets are decreased by entries on the right side.
• Liabilities and Stockholders’ Equity are increased by entries on the right side.
• Liabilities and Stockholders’ Equity are decreased by entries on the left side.

All one has to remember is that increases for assets are reported on the left side of the account and are the opposite of increases for liabilities and stockholders’ equities, and that decreases for any account are the opposite of increases for that account. The process of recording transactions consists of determining what accounts are affected, whether they are asset or liability and equity accounts, and whether they are to be increased or decreased. With this information, any transaction can be recorded.

• Debits and Credits. It is awkward to speak of entries “to the left side

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